Fitch Rates Tacoma, Washington's $21.7MM Solid Waste Utility Revs 'A'; Affirms Outstanding.

NEW YORK -- Fitch Ratings assigns its 'A' rating to the City of Tacoma, WA's (the city) $21,670,000 solid waste utility revenue refunding bonds, 2006 series. The bonds will be sold on or about September 12, 2006 through negotiation by Goldman Sachs & Co. Fitch also affirms the 'A' rating on $71.2 million in outstanding parity debt. The Rating Outlook is Stable.

The 'A' rating reflects the city's municipal control over collection and disposal of all residential and commercial solid waste, the joint billing with other city utilities, the solid waste system's financial flexibility provided from sizeable cash balances, its sound management and financial policies, and strong debt service coverage. These credit factors are balanced with risks of above-average rates, dependence upon a commercial customer base, higher expenses associated with disposal operations, and a landfill disposal contract which expires six years prior to final amortization of outstanding bonds.

The bonds are payable from net revenues of the solid waste utility. Customers receive one bill for all city utility services, including sewer, water, electric, stormwater, and solid waste. Revenues collected on the utility bill account for 87% of total $48.8 million in fiscal 2005 solid waste system revenue, with self-haul tipping fee revenues making up the rest. The city has shown a willingness to raise rates and fees as necessary to offset higher than projected operating costs, with charges set by city council in consult with a customer advisory panel. Tacoma's rates are the highest in the area, although the fee includes some services charged separately by other entities.

The city's waste is mostly disposed under long haul contracts to privately owned landfills with the remainder recycled and composted. In 2005, the city council decided not to pursue reopening the steam plant, which had been closed for many years. The city recently received a $3.3 million breach of contract settlement from the plant operator. The city landfill is now used only for emergency capacity. In 2005, 79% of the waste was disposed in private landfills, up from 43% in 2000.

Commercial customers are charged higher rates, resulting in a dependence on this group for a high 45% of operating revenue. Residential customers make up 38% of revenues although they are 91% of all accounts. Nonetheless, the customer base is diverse, with the largest 10 commercial users making up a moderate 7% of total revenue.

Despite the change in the system's disposal methods, financial operations provide good debt service coverage and strong cash balances. Fiscal 2005 net available revenues for debt service of $13.3 million covered annual debt service 1.98 times (x) and new maximum annual debt service (MADS) 1.7x. Projected coverage of MADS is 2.3x over the forecast period ending 2009. Due to higher expenses, partially offset by rate increases, debt service coverage levels are lower than original estimates when the series 2001 bonds were sold. The city maintains a high $7.4 million in a rate stabilization fund. The system is highly liquid with $20 million held in cash, over 190 days in reserve.

Financial policies are sound and stricter than legal covenants in the bond documents. City policy seeks 1.70x debt service coverage, while the actual additional bonds test requires net revenue to cover MADS at least 1.25x. The rate covenant also is 1.25x annual debt service including up to 25% of revenue from the rate stabilization fund. The legal requirements allow somewhat liberal adjustments to revenues, although Fitch's concern is offset by the relatively high coverage requirement and strong historical and projected coverage.

Following the issuance in June 2006 of the series 2006A bonds, outstanding bonds now reach final maturity in 2026, six years after the landfill contract expires. While the city has time to arrange for renewal and internal options, Fitch views this as restraining credit quality.

For further information please see the report 'Tacoma, Washington (Solid Waste Management) - solid waste rev & rfdg bonds ser 2006' dated June 26, 2006, available on the Fitch Ratings web site www.fitchratings.com.

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